IDEAS home Printed from https://ideas.repec.org/a/pal/jorsoc/v55y2004i8d10.1057_palgrave.jors.2601755.html
   My bibliography  Save this article

Customer lifetime value: stochastic optimization approach

Author

Listed:
  • W-K Ching

    (University of Hong Kong)

  • M K Ng

    (University of Hong Kong)

  • K-K Wong

    (University of Hong Kong)

  • E Altman

    (INRIA, Sophia-Antipolis Cedex)

Abstract

Since the early 1980s, the concept of relationship marketing has been becoming important in general marketing, especially in the area of direct and interactive marketing. The core of relationship marketing is the maintenance of long-term relationships with the customers. However, the relationship marketing is costly and therefore, the determination of the customer lifetime value (CLV) is an important element in making strategic decisions in both advertising and promotion. In this paper, we propose a stochastic dynamic programming model with a Markov chain for the optimization of CLV. Both cases of infinite horizon and finite horizon are discussed. The model is then applied to practical data of a computer service company.

Suggested Citation

  • W-K Ching & M K Ng & K-K Wong & E Altman, 2004. "Customer lifetime value: stochastic optimization approach," Journal of the Operational Research Society, Palgrave Macmillan;The OR Society, vol. 55(8), pages 860-868, August.
    • Handle: RePEc:pal:jorsoc:v:55:y:2004:i:8:d:10.1057_palgrave.jors.2601755
    DOI: 10.1057/palgrave.jors.2601755
    as

    Download full text from publisher

    File URL: http://link.springer.com/10.1057/palgrave.jors.2601755
    File Function: Abstract
    Download Restriction: Access to full text is restricted to subscribers.
    File URL: https://libkey.io/10.1057/palgrave.jors.2601755?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Berger, Paul D. & Bechwati, Nada Nasr, 2001. "The allocation of promotion budget to maximize customer equity," Omega, Elsevier, vol. 29(1), pages 49-61, February.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. So, Meko M.C. & Thomas, Lyn C., 2011. "Modelling the profitability of credit cards by Markov decision processes," European Journal of Operational Research, Elsevier, vol. 212(1), pages 123-130, July.
    2. Giuliano Tirenni & Abderrahim Labbi & Cesar Berrospi & André Elisseeff & Timir Bhose & Kari Pauro & Seppo Pöyhönen, 2007. "—Customer Equity and Lifetime Management (CELM) Finnair Case Study," Marketing Science, INFORMS, vol. 26(4), pages 553-565, 07-08.
    3. Michelle Yoo & Billy Bai & Ashok Singh, 2020. "The evolution of behavioral loyalty and customer lifetime value over time: investigation from a Casino Loyalty Program," Journal of Marketing Analytics, Palgrave Macmillan, vol. 8(2), pages 45-56, June.
    4. Sun, Yang & Garrett, Tony C. & Kim, Kyung Hoon, 2016. "Do Confucian principles enhance sustainable marketing and customer equity?," Journal of Business Research, Elsevier, vol. 69(9), pages 3772-3779.
    5. Olafsson, Sigurdur & Li, Xiaonan & Wu, Shuning, 2008. "Operations research and data mining," European Journal of Operational Research, Elsevier, vol. 187(3), pages 1429-1448, June.
    6. Hamidreza Koosha & Amir Albadvi, 2020. "Allocation of marketing budgets to maximize customer equity," Operational Research, Springer, vol. 20(2), pages 561-583, June.
    7. Blattberg, Robert C. & Malthouse, Edward C. & Neslin, Scott A., 2009. "Customer Lifetime Value: Empirical Generalizations and Some Conceptual Questions," Journal of Interactive Marketing, Elsevier, vol. 23(2), pages 157-168.
    8. Ekinci, Yeliz & Ülengin, Füsun & Uray, Nimet & Ülengin, Burç, 2014. "Analysis of customer lifetime value and marketing expenditure decisions through a Markovian-based model," European Journal of Operational Research, Elsevier, vol. 237(1), pages 278-288.
    9. Tudoran, Ana Alina & Hjerrild Thomsen, Charlotte & Thomasen, Sophie, 2024. "Understanding consumer behavior during and after a Pandemic: Implications for customer lifetime value prediction models," Journal of Business Research, Elsevier, vol. 174(C).
    10. H-Y Tsao & P-C Lin & L Pitt & C Campbell, 2009. "The impact of loyalty and promotion effects on retention rate," Journal of the Operational Research Society, Palgrave Macmillan;The OR Society, vol. 60(5), pages 646-651, May.
    11. Kessara Kanchanapoom & Jongsawas Chongwatpol, 2023. "Integrated customer lifetime value (CLV) and customer migration model to improve customer segmentation," Journal of Marketing Analytics, Palgrave Macmillan, vol. 11(2), pages 172-185, June.
    12. Mehrdad Memarpour & Erfan Hassannayebi & Navid Fattahi Miab & Ali Farjad, 2021. "Dynamic allocation of promotional budgets based on maximizing customer equity," Operational Research, Springer, vol. 21(4), pages 2365-2389, December.
    13. Kumar, V. & Pozza, Ilaria Dalla & Petersen, J. Andrew & Shah, Denish, 2009. "Reversing the Logic: The Path to Profitability through Relationship Marketing," Journal of Interactive Marketing, Elsevier, vol. 23(2), pages 147-156.
    14. C Lin & Y-T Lin, 2008. "Robust analysis on promotion duration for two competitive brands," Journal of the Operational Research Society, Palgrave Macmillan;The OR Society, vol. 59(4), pages 548-555, April.
    15. Dahana, Wirawan Dony & Miwa, Yukihiro & Morisada, Makoto, 2019. "Linking lifestyle to customer lifetime value: An exploratory study in an online fashion retail market," Journal of Business Research, Elsevier, vol. 99(C), pages 319-331.
    16. Yeliz Ekinci & Füsun Ulengin & Nimet Uray, 2014. "Using customer lifetime value to plan optimal promotions," The Service Industries Journal, Taylor & Francis Journals, vol. 34(2), pages 103-122, January.
    17. Michelle Yoo & Billy Bai & Ashok Singh, 0. "The evolution of behavioral loyalty and customer lifetime value over time: investigation from a Casino Loyalty Program," Journal of Marketing Analytics, Palgrave Macmillan, vol. 0, pages 1-12.
    18. Michael Löffler & Reinhold Decker, 2012. "Identifikation und praktische Nutzung von Mustern des Aufwärtskonsums," Schmalenbach Journal of Business Research, Springer, vol. 64(7), pages 722-746, November.
    19. von Janda, Sergej & Polthier, Andreas & Kuester, Sabine, 2021. "Do they see the signs? Organizational response behavior to customer complaint messages," Journal of Business Research, Elsevier, vol. 137(C), pages 116-127.
    20. Hans Buhl & Martin Gneiser & Julia Heidemann, 2009. "Ein modelltheoretischer Ansatz zur Planung von Investitionen in Kundenbeziehungen," Metrika: International Journal for Theoretical and Applied Statistics, Springer, vol. 20(2), pages 175-195, October.
    21. Hans Buhl & Robert Klein & Johannes Kolb & Andrea Landherr, 2011. "CR 2 M—an approach for capacity control considering long-term effects on the value of a customer for the company," Metrika: International Journal for Theoretical and Applied Statistics, Springer, vol. 22(2), pages 187-204, December.
    22. Verhoef, Peter C. & Venkatesan, Rajkumar & McAlister, Leigh & Malthouse, Edward C. & Krafft, Manfred & Ganesan, Shankar, 2010. "CRM in Data-Rich Multichannel Retailing Environments: A Review and Future Research Directions," Journal of Interactive Marketing, Elsevier, vol. 24(2), pages 121-137.
    23. Cui, Geng & Wong, Man Leung & Wan, Xiang, 2015. "Targeting High Value Customers While Under Resource Constraint: Partial Order Constrained Optimization with Genetic Algorithm," Journal of Interactive Marketing, Elsevier, vol. 29(C), pages 27-37.
    24. Klein, Robert & Kolb, Johannes, 2015. "Maximizing customer equity subject to capacity constraints," Omega, Elsevier, vol. 55(C), pages 111-125.
    25. Fader, Peter S. & Hardie, Bruce G.S., 2009. "Probability Models for Customer-Base Analysis," Journal of Interactive Marketing, Elsevier, vol. 23(1), pages 61-69.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Paul D Berger, 2016. "One man’s path to marketing analytics," Journal of Marketing Analytics, Palgrave Macmillan, vol. 4(1), pages 1-13, March.
    2. Wang, Deshen & Chen, Bintong & Chen, Jing, 2019. "Credit card fraud detection strategies with consumer incentives," Omega, Elsevier, vol. 88(C), pages 179-195.
    3. Yong-Wu Zhou & Chuanying Chen & Yuanguang Zhong & Bin Cao, 2020. "The allocation optimization of promotion budget and traffic volume for an online flash-sales platform," Annals of Operations Research, Springer, vol. 291(1), pages 1183-1207, August.
    4. Ekinci, Yeliz & Ülengin, Füsun & Uray, Nimet & Ülengin, Burç, 2014. "Analysis of customer lifetime value and marketing expenditure decisions through a Markovian-based model," European Journal of Operational Research, Elsevier, vol. 237(1), pages 278-288.
    5. Martín-Herrán, Guiomar & McQuitty, Shaun & Sigué, Simon Pierre, 2012. "Offensive versus defensive marketing: What is the optimal spending allocation?," International Journal of Research in Marketing, Elsevier, vol. 29(2), pages 210-219.
    6. Mirzaei, Abas & Baumann, Chris & Johnson, Lester W. & Gray, David, 2016. "The impact of brand health on customer equity," Journal of Retailing and Consumer Services, Elsevier, vol. 33(C), pages 8-16.
    7. Pfeifer, Phillip E. & Ovchinnikov, Anton, 2011. "A Note on Willingness to Spend and Customer Lifetime Value for Firms with Limited Capacity," Journal of Interactive Marketing, Elsevier, vol. 25(3), pages 178-189.
    8. Ma, Ming & Li, Zehui & Chen, Jinyuan, 2008. "Phase-type distribution of customer relationship with Markovian response and marketing expenditure decision on the customer lifetime value," European Journal of Operational Research, Elsevier, vol. 187(1), pages 313-326, May.
    9. Hans Buhl & Robert Klein & Johannes Kolb & Andrea Landherr, 2011. "CR 2 M—an approach for capacity control considering long-term effects on the value of a customer for the company," Metrika: International Journal for Theoretical and Applied Statistics, Springer, vol. 22(2), pages 187-204, December.
    10. Chiang, Lan-Lung (Luke) & Yang, Chin-Sheng, 2018. "Does country-of-origin brand personality generate retail customer lifetime value? A Big Data analytics approach," Technological Forecasting and Social Change, Elsevier, vol. 130(C), pages 177-187.
    11. Hamidreza Koosha & Amir Albadvi, 2020. "Allocation of marketing budgets to maximize customer equity," Operational Research, Springer, vol. 20(2), pages 561-583, June.
    12. Lhoest-Snoeck, Sietske & van Nierop, Erjen & Verhoef, Peter C., 2014. "For New Customers Only: A Study on the Effect of Acquisition Campaigns on a Service Company's Existing Customers' CLV," Journal of Interactive Marketing, Elsevier, vol. 28(3), pages 210-224.
    13. G. E. Fruchter & S. P. Sigué, 2009. "Social Relationship and Transactional Marketing Policies—Maximizing Customer Lifetime Value," Journal of Optimization Theory and Applications, Springer, vol. 142(3), pages 469-492, September.
    14. Berry, Leonard L. & Bolton, Ruth N. & Bridges, Cheryl H. & Meyer, Jeffrey & Parasuraman, A. & Seiders, Kathleen, 2010. "Opportunities for Innovation in the Delivery of Interactive Retail Services," Journal of Interactive Marketing, Elsevier, vol. 24(2), pages 155-167.
    15. Chang, Shuhua & Zhang, Zhaowei & Wang, Xinyu & Dong, Yan, 2020. "Optimal acquisition and retention strategies in a duopoly model of competition," European Journal of Operational Research, Elsevier, vol. 282(2), pages 677-695.
    16. Holm, Morten & Kumar, V. & Plenborg, Thomas, 2016. "An investigation of Customer Accounting systems as a source of sustainable competitive advantage," Advances in accounting, Elsevier, vol. 32(C), pages 18-30.
    17. Hans Buhl & Martin Gneiser & Julia Heidemann, 2009. "Ein modelltheoretischer Ansatz zur Planung von Investitionen in Kundenbeziehungen," Metrika: International Journal for Theoretical and Applied Statistics, Springer, vol. 20(2), pages 175-195, October.
    18. Tarek Ben Rhouma & Georges Zaccour, 2018. "Optimal Marketing Strategies for the Acquisition and Retention of Service Subscriber," Management Science, INFORMS, vol. 64(6), pages 2609-2627, June.
    19. R C Hanna & P D Berger & L J Abendroth, 2005. "Optimizing time limits in retail promotions: an email application," Journal of the Operational Research Society, Palgrave Macmillan;The OR Society, vol. 56(1), pages 15-24, January.
    20. Marín, Alfredo, 2011. "The discrete facility location problem with balanced allocation of customers," European Journal of Operational Research, Elsevier, vol. 210(1), pages 27-38, April.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:pal:jorsoc:v:55:y:2004:i:8:d:10.1057_palgrave.jors.2601755. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.palgrave-journals.com/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.